Inflation may finally be coming down, but the most recently-published CPI rate of 4% is still twice the government’s own 2% target, and the cost of living is still very much at the forefront of consumers’ minds.
It is a big issue for business, too. A year of soaring inflation has resulted in businesses fighting escalating production costs, ever-increasing labour costs, and pressure from customers on how they can price their goods and services. This in turn has seen a squeeze on profit margins and the bottom line.
Despite the headline inflation rate steadily decreasing, many of the things which make up a typical business’s cost base – such as fuel for transport – remain stubbornly expensive.
Couple this with an increase in the National Living Wage of 9.8% in April, and the fact that interest rates will need to remain at or about their current high level to ensure that inflationary pressures don’t rear their ugly heads once more, and it is plain that inflation will remain a big challenge for businesses for many months to come.
Fortunately, there are some strategies that businesses can adopt to mitigate the effects of inflation. Here are six such strategies.
1. Diversify your supplier base
How you source raw materials is the most obvious place to start when looking to control costs. Not only are prices still rising, but geo-political uncertainty (such as the situation in the Red Sea with the Houthi rebels threatening access to the Suez Canal) could well further restrict supplies and add costs.
So it is more important than ever to have a diversified supplier base, not just to secure your supply chain, but also to ensure you are getting the best price for the best product. With prices continuing to rise, it is worth considering secured future ordering or bulk orders to lock in current prices.
2. Monitor your overheads
You would be surprised how many businesses don’t review their overhead spending, simply assuming that because they have done it one way for a long time, that this is the best - or indeed only - way to do it. Almost all businesses will have some slack in their overhead costs; a period of high inflation is the prefect time to review these business overheads.
It is a case of questioning whether each element of overheads is actually required, and if so, whether they are being procured in the most cost-effective way. This is also an opportunity for a mini business health check, as it may turn out that some items which are essential to the efficient running of the business have been overlooked.
3. Review your pricing
At a time when customers, whether they are consumers or other businesses, are also feeling the pinch, it may seem counter-intuitive to be thinking about increasing the prices you charge for your goods and services. But maintaining your profit margin is essential to the health of your business, and if your input costs are rising, the only way you can achieve a consistent margin is by increasing your output prices.
At a time of rapidly rising costs, there are some simple strategies which can be put in place, such as reducing the standard 60-90 day window of validity for a quote, perhaps to as little as 7-14 days. This will allow you to adjust to future input cost increases.
Of course, your pricing strategy will always be about finding the balance between what the market will bear and what you need to charge to maintain your margin. But too many businesses only think about the former, at the expense of the latter.
4. Retain your staff
It is a truism that it is always cheaper to retain existing staff than recruit new staff, and that is particularly so in the current labour market. So you need to ensure you have a robust staff retention strategy in place.
Of course, a big part of this will be financial: your employees have their own cost of living pressures, so ensuring they are remunerated properly is vital. Performance-based incentives and other rewards can align employee interests with the business’s goals, which will go some way towards mitigating against the demand for higher salaries.
But increasingly, it’s not just about the money. Wellbeing programmes, mental health awareness, work/life balance, flexible working hours, offering hybrid working: these are all things you should be considering when planning your retention strategy. They could just be the difference which persuades your staff to stay with you rather than be tempted by a higher base salary offered by a competitor.
5. Look at your financial plans
Financial advisers always suggest that individuals build up a ‘rainy day’ fund, and it is no different for businesses. Maintaining sufficient cash reserves will ensure you have options moving forward, and that you can seize the opportunity to gain a competitive advantage by investing (in a new piece of machinery for example) without the need to take on borrowing at high interest rates.
That said, if your business is carrying debt, it is almost always cheaper to pay off that debt than to hold cash reserves, and regularly reviewing your business’s debt levels at a time of higher interest rates is a must-do.
Many businesses carry their cash reserves in their current account, instead of transferring them into interest-paying deposit accounts or other savings products. Being able to make a return on cash is the one silver lining to the high interest rate cloud!
6. Review credit terms
Keeping on top of outstanding invoices and ensuring your receive payments more quickly becomes even more important at times of high interest rates and rising costs. It is vital to be able to review debtors on a daily basis, which is something which cloud accounting has made very much easier, especially for small businesses.
You should consider ways to get clients to make their payments more quickly and efficiently, from ensuring you include payment terms and bank account details on your invoices to considering early settlement discounts.